Global X ETFs has expanded its suite of systematic covered call strategies in the US with the launch of two new funds based on ESG-tailored versions of the S&P 500 and Nasdaq 100.
Rohan Reddy, Director of Research at Global X ETFs.
The Global X S&P 500 ESG Covered Call ETF (XYLE US) and Global X Nasdaq 100 ESG Covered Call ETF (QYLE US) have been listed on NYSE Arca and Nasdaq, respectively.
Each ETF comes with an expense ratio of 0.60%.
XYLE and QYLE are linked to the Cboe S&P 500 ESG BuyWrite Index and Nasdaq-100 ESG BuyWrite Index, respectively. The indices consist of long positions in the S&P 500 ESG Index and Nasdaq 100 ESG Index combined with systematic covered call overlays.
The S&P 500 ESG Index and Nasdaq 100 ESG Index provide exposure to sub-sets of the S&P 500 and Nasdaq 100, selecting stocks that have been comprehensively screened according to socially responsible criteria.
A covered call is an options strategy whereby an investor holds a long position in an asset and sells or “writes” call options on that same asset in an attempt to generate more income (the additional income from the option’s premium) than the asset would otherwise provide on its own from dividends or other distributions.
Historically, during bear markets, range-bound markets, and modest bull markets, covered call strategies have generally outperformed their underlying securities. However, during strong bull markets, when the underlying securities may frequently rise through their strike prices, covered call strategies historically have tended to lag.
In terms of the new ETFs’ strategy, the funds directly replicate the S&P 500 ESG and Nasdaq 100 ESG indices while simultaneously writing one-month call options on the indices for 100% of the portfolios’ net assets. The call options are written at-the-money and are rolled on a monthly basis.
The strategy effectively eliminates all potential upside related to the performance of the ETFs’ equity holdings. Instead, it generates high, steady income from the option premiums with the ETFs making distributions to investors on a monthly basis. The strategy may be utilized by investors who wish to diversify their sources of yield away from equities and bonds which historically have struggled during rising rate environments.
Global X offers another ten covered call ETFs in the US. The suite, which houses many billions of dollars in assets under management, includes funds based on the S&P 500, Nasdaq 100, Dow Jones Industrial Average, and Russell 2000 indices.
The newest additions deliver the same income-focused strategy as the existing ETFs in the suite but are geared towards socially responsible investors who are concerned about the ESG profiles of the funds’ equity holdings.
Commenting on the ETFs’ listing, Rohan Reddy, Director of Research at Global X ETFs, said: “Many investors turn to covered call strategies as they navigate uncertain economic conditions amid rising rates and fears of a market downturn. With the launch of these new ETF strategies, we are providing investors with two products that will allow them to invest in the equities of companies displaying positive ESG characteristics while also potentially generating income and monetizing volatility.”